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Awareness of competitive forces can help a

company stake out a position in its industry
that is less vulnerable to attack.

Michael E. Porter
Competitive Strategy
Was not developed for IS use

Breaks an industry into logical parts, analyzes

them and puts them back together.

Avoids viewing the industry too narrowly.

Provides an understanding of the structure of
an industrys business environment.

Provides an understanding of competitive

threats into an industry.
Two Key Questions
How structurally attractive is the industry?

What is the companys relative position within

the industry?
Why do we need to care?
The collective strength of the industry forces
determines the ultimate profit potential of an
Why do we need to care? (c0nt)
The strongest competitive forces are of greatest
importance in formulating competitive
Why do we need to care? (c0nt)
Every industry has an underlying structure, or a
set of fundamental economic and technical
characteristics that gives rise to these
competitive forces.
Why do we need to care? (c0nt)
This view of competition pertains to industries
selling products and those dealing in services.
Why do we need to care? (c0nt)
A few characteristics are often key to the
strength of each competitive force.
Key industry analysis factors
Collecting the data.

Determining which data is important.

Selecting an appropriate overall approach.

Deciding on the logical starting point.

Basic objectives
To create effective links with buyers and

To build barriers to new entrants and substitute

Source: Developed from Michael E. Porter, Competitive Strategy (New York: Free Press, 1980).
Michael E Porter proposes that managers
should view the organizational environments
in terms of five competitive forces:
The threat of new entrants
Competitive rivalry
The threat of substitute products
The power of buyers
The power of suppliers
New entrants
An existing company or a start-up that has not
previously competed with the SBU in its
geographic market.

It can also be an existing company that through a

shift in business strategy begins to compete with
the SBU.
The threat of new entrants
The extent to which new competitors can easily
enter a market or market segment.

Entrance is easier for market requiring a small

amount of capital to open and more difficult when
it takes a tremendous investment in plant,
equipment and distribution systems
The threat of new entrants (cont)
The internet has reduced the costs and other
barriers of entry into many market segments so
the threat has increased for many firms.
Possible barriers to entry
Economies of scale.

Strong, established cost advantages.

Strong, established brands.

Proprietary product differences.

Major switching costs.

Possible barriers to entry (cont)
Limited or restrained access to distribution.

Large capital expenditure requirements.

Government policy.

Definite strong competitor retaliation.

Competitive rivalry
The nature of the competitive relationship
between firms in the industry.

Large firms, dominant in the field, engage in price

wars, comparative advertising and new-product

Small establishments, in contrast, do not

generally engage in such practices.
Rivalry likelihood?
Profit margins.

Industry growth rate and potential.

A lack of capacity to satisfy the market.

Fixed costs.

Competitor concentration and balance.

Rivalry likelihood?
Diversity of competitors.

Existing brand identity.

Switching costs.

Exit barriers.
Substitute products / service
An alternative to doing business with the SBU.

This depends on the willingness of the buyers to

substitute, the relative price/performance of the
substitute and/or the level of the switching cost.
The threat of substitute products
The extent to which alternative products or
services may take the place of or diminish the
need for existing products and/or services.
Substitute threats
Buyer propensity to substitute.

Relative price/performance of substitutes.

Switching costs.
The power of buyers
The extent to which buyers of the products or
services in an industry have the ability to influence
the suppliers.
A buyer has power if:
It has large, concentrated buying power that
enables it to gain volume discounts and/or special
terms or services.

What it is buying is standard or undifferentiated

and there are multiple alternative sources.

It earns low profit margins so it has great

incentive to lower its purchasing costs.
A buyer has power if: (cont)
It has a strong potential to backward integrate.

The product is unimportant to the quality of the

buyers products or services.
The power of suppliers
The extent to which suppliers have the ability to
influence potential buyers.

The power of the supplier depends on the product

being offered. The more restricted the service or
product, the more power to the supplier.
Suppliers have power if:
There is domination of supply by a few

Its product is unique or at least differentiated.

It has built up switching costs.

Suppliers have power if: (cont)
It provides benefits through geographic proximity
to its customers.

It poses a definite threat to forward integrate into

its customers business.

A long time working relationship provides unique

To incorrectly define the industry can cause major
problems in doing the analysis.

You must identify the specific market being


Your analysis company is the Strategic Business

Tips: (cont)
Identify rivals by name for majors, by category for
minor rivals if needed to present the best possible
profile of rivals.

Be sure to address the power implications of both

customers and suppliers. Power buys them what?
Tips: (cont)
Identify buyers and suppliers by categories versus

Summarize your Porter Model analysis.

Type of market structure influences how a
firm behaves:
Barriers to Entry
Degree of competition in the industry
High levels of competition Perfect competition
Limited competition Monopoly
Degrees of competition in between
Determinants of market structure
Number and size of firms that make up
the industry
Freedom of entry and exit
Nature of the product homogenous (identical),
Control over supply/output
Control over price
Perfect Competition:
One extreme of the market structure spectrum
Free entry and exit to industry
Homogenous product identical so no consumer
Large number of buyers and sellers no individual
seller can influence price
Perfect Competition:
Sellers are price takers have to accept the
market price
Perfect information/knowledge available to
buyers and sellers
Each producer supplies a very small proportion
of total industry output
Perfect Competition
What happens in a competitive environment?
New idea Firm makes short term abnormal profit
Other firms enter the industry to take advantage of
abnormal profit
Supply increases price falls
Long run normal profit made
Choice for consumer
Price sufficient for normal profit to be made
Imperfect or Monopolistic Competition
Where the conditions of perfect competition do
not hold, imperfect competition will exist
Varying degrees of imperfection give rise to
varying market structures
Monopolistic competition is one of these not to
be confused with monopoly!
Imperfect or Monopolistic Competition
Many buyers and sellers
Products differentiated
Relatively free entry and exit
Each firm may have a tiny monopoly because of
the differentiation of their product
Imperfect or Monopolistic Competition
May have some element of control over price due
to the fact that they are able to differentiate their
product in some way from their rivals products
are therefore close, but not perfect, substitutes
Consumer and producer knowledge imperfect
Competition amongst the few
May be a large number of firms in the industry but
the industry is dominated by a small number of
very large producers
Industry dominated by small number of large
Many firms may make up the industry
High barriers to entry
Nonprice competition may be prevalent
Price stability within the market - kinked demand
Potential for collusion?
Abnormal profits
High degree of interdependence between firms
Behaviour of firms affected by what they believe
their rivals might do interdependence of firms
Goods could be homogenous or highly
Branding and brand loyalty may be a potent
source of competitive advantage
Oligopoly Kinked Demand Curve


D = elastic
Kinked D Curve
D = Inelastic

100 Quantity
Industry dominated by two large firms
Possibility of price leader emerging rival will
follow price leaders pricing decisions
High barriers to entry
Abnormal profits likely
Highly interdependent
Through growth of the firm
Through amalgamation, merger or takeover
Through acquiring patent or license
Through legal means Royal charter, nationalisation,
wholly owned plc
Pure monopoly industry is the firm!
Actual monopoly where firm has >25% market
Natural Monopoly high fixed costs electricity
Monopoly power
Refers to cases where firms influence the market in
some way through their behaviour determined by the
degree of concentration in the industry
Influencing prices
Influencing output
Erecting barriers to entry
Pricing strategies to prevent or stifle competition
May not pursue profit maximisation encourages unwanted
entrants to the market
Sometimes seen as a case of market failure
High barriers to entry
Firm controls price OR output/supply
Abnormal profits in long run
Possibility of price discrimination
Consumer choice limited